Google Riding High Amid Economic Turbulence

Google, long thought to be nearly recession-proof, proved its strength once more amid a battered economy.

The company turned in a solid third quarter, today reporting revenues of $5.54 billion, a 31 percent increase from the same period a year ago. Net revenue — that is, revenue after about $1.5 billion in payouts to publishing partners — totaled $4.04 billion. Excluding special items, the search king also posted earnings of $4.92 per share on net income of $1.56 billion.

Analysts polled by Thompson Reuters were looking for earnings of $4.79 on net revenue of $4.05 billion.

The company also posted healthy free cash flow of $1.7 billion.

“We had a good third quarter with strong traffic and revenue growth across all of our major geographies thanks to the underlying strength of our core search and ads business,” CEO Eric Schmidt said in a statement. “While we are realistic about the poor state of the global economy, we will continue to manage Google for the long term, driving improvements to search and ads, while also investing in future growth areas such as enterprise, mobile and display.”

Google’s (NASDAQ: GOOG) resilience has been due in large measure to its position atop the search-advertising market. Analysts have noted that at a time when marketers are slashing their advertising budgets, they tend to shift more of their money toward search ads, which offer greater accountability than display ads and other formats. Unlike display ads, which are sold on a cost-per-thousand impressions (CPM) rate, advertisers only pay for a search ads when a user clicks on it, so the cost is tied to a measurable action.

Fifty-one percent of the company’s revenue came from outside the United States. Google said that a fluctuating exchange rate cost the company $59 million in revenue.

Google’s shares ended the day up 4 percent to $353.02 and continues to rise in after-hours trading.

The company does not provide forward-looking guidance.

The third quarter saw the company dive headlong into the mobile arena with the unveiling of T-Mobile’s G1 smartphone, the first device built on Google’s open source Android platform.

On the regulatory front, a good deal of Google’s energy is currently devoted to trying to assuage the concerns of antitrust officials reviewing the company’s proposed search-advertising partnership with Yahoo (NASDAQ: YHOO).

Through that arrangement, Google would supply ads for a limited amount of the queries made on Yahoo’s search engine. Opponents of the deal, most vocally Microsoft (NASDAQ: MSFT), have argued that the deal would presage Yahoo’s exit from the search market, by ceding an ever-greater portion of its search ads to its larger rival. They also charge that it will have the ultimate effect of raising prices for advertisers.

Google and Yahoo have both countered that they will remain vigorous competitors, noting that the deal is nonexclusive, and only applies to the Web properties that Yahoo owns. The companies say that the market will set the price of search ads, given that advertisers bid on keywords in an auction format.

The Department of Justice has been reviewing the deal since it was announced in June. About a dozen states’ attorneys general have joined in the review, and regulators in Canada and Europe have opened their own investigation.

Since they are not merging, the companies did not need regulatory approval, but volunteered to put the deal on hold to accommodate a review. They recently said that they would delay implementation further to give regulators more time to evaluate the antitrust implications.

Throughout the quarter, Google has made several modifications to its own ad platform, including an ongoing reduction in the number of ads it places on its search pages. The company claims that placing fewer, more relevant ads will improve the results for advertisers, while also generating more revenue for Google owing to a higher paid-click rate.

Earlier this year, Google’s share price took a hit when a report from comScore about a decline in overall paid clicks led jittery investors to begin selling the stock.

Google also continues to experiment with new ad formats for its popular video-sharing site YouTube. Executives often talk up the monetization opportunities they see in the site that accounts for nearly 40 percent of all videos watched online, but they admit that they have yet to hit on the right format.

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